In Re S.W. Bach & Company

Citation435 B.R. 866
Decision Date18 August 2010
Docket NumberBankruptcy No. 07-11569 (MG).,Adversary No. 09-01278 (MG).
PartiesIn re S.W. BACH & COMPANY, Debtor. Albert Togut, as Chapter 7 Trustee of S.W. Bach & Company, Plaintiff, v. RBC Dain Correspondent Services, a Division of RBC Dain Rauscher Inc., RBC Capital Markets Corporation (f/k/a RBC Dain Rauscher, Inc.), Andrew Garrett, Inc., Scott Shapiro and JAS Management, Defendants.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York




Togut, Segal & Segal LLP, by Steven S. Flores, Esq., New York, NY, Attorneys for Albert Togut, Chapter 7 Trustee.

Law Offices of Joseph M. Heppt, by Joseph M. Heppt, Esq., New York, NY, Attorneys for Defendant Andrew Garrett, Inc.

MARTIN GLENN, Bankruptcy Judge.

Albert Togut, the chapter 7 trustee (Trustee) of S.W. Bach & Company (S.W. Bach or the “Debtor”), a former broker-dealer, seeks partial summary judgment under Fed.R.Civ.P. 56, made applicable to bankruptcy proceedings by Fed. R. Bankr.P. 7056, against broker-dealer Andrew Garrett, Inc. (AGI), on the Trustee's constructive fraudulent transfer claim under 11 U.S.C. § 548(a)(1)(B) (“Count Nine”). (“Motion”). AGI in turn seeks denial of partial summary judgment and a dismissal of Count Nine.

On February 23, 2007, S.W. Bach's president, Scott Shapiro (Shapiro), directed S.W. Bach's clearing agent, RBC Dain Correspondent Services/RBC Capital Markets Corporation (collectively, RBC Dain), to transfer S.W. Bach's customer accounts (with the attendant right to manage the accounts, as well as customer information and relationships) to AGI. It is the transfer of those accounts without consideration that the Trustee challenges as a constructive fraudulent conveyance. At the time Shapiro directed RBC Dain to transfer the accounts to AGI, Shapiro filed a Uniform Request for Broker-Dealer Withdrawal (“Form BDW”) with the Securities and Exchange Commission (“SEC”) and the National Association of Securities Dealers (“NASD”), requesting withdrawal of S.W. Bach's registration as a broker-dealer. The effect of the filing of the Form BDW was to require S.W. Bach immediately to cease conducting its securities business.

The only disputed issue that must be resolved on this summary judgment motion is the legal issue whether the transfer of the accounts resulted in a “transfer of an interest of the debtor in property” under section 548(a)(1)(B) of the Bankruptcy Code. The Trustee argues that it does; AGI argues that the filing of the Form BDW terminated S.W. Bach's rights in the accounts such that the transfer without consideration was not a transfer of an interest of the debtor in property. For the reasons explained below, the Court grants the Trustee's motion for partial summary judgment, concluding that the transfer of the accounts was a “transfer of an interest of the debtor in property” pursuant to 11 U.S.C. § 548(a)(1)(B). As the other elements of the constructive fraudulent conveyance have been established, liability is established and what remains are issues concerning damages for which a trial will be required.

A. Undisputed Material Facts 1

During 2006, S.W. Bach's financial condition was deteriorating to the point that it risked failing to meet capital requirements for a broker-dealer. Absent an infusion of capital or a sale of the business, S.W. Bach faced the compelled shut down of its business. In October 2006, Shapiro began meeting with AGI to discuss a possible transfer of the customer accounts serviced by S.W. Bach, including all customer information and the right to earn fees from managing the accounts (collectively, the “Accounts”) from S.W. Bach to AGI. ( See Trustee Stmt. at ¶¶ 9, 11.) On or about October 4, 2006, S.W. Bach provided AGI with seven e-mails with financial information concerning the Debtor. ( See id. at ¶ 12.) On February 14, 2007, Andrew Sycoff, the president of AGI (“Sycoff”), attended a meeting with the NASD to discuss AGI's potential acquisition of the Accounts. ( Id. at ¶¶ 14-15.) Sycoff did not disclose that meetings with Shapiro began in October 2006. ( Id. at ¶ 18.) Following the meeting, Sycoff informed the NASD that AGI did not wish to purchase the Accounts, but instead would play the role of a “white knight” to “provide a safe haven for the customers and brokers because of the ease of cutting them over to our system because both firms cleared through RBC Dain.” ( See id. at ¶¶ 8, 17.)

The right to manage the Accounts was a valuable right, and an asset of S.W. Bach, at least until February 23, 2007. ( Id. at ¶ 40.) Furthermore, prior to February 23, 2007, AGI promised Shapiro that it was going to employ Shapiro following a transfer of the Accounts and pay a fee for the Accounts to Shapiro, and engaged in various communications with Shapiro regarding transferring the Accounts. ( Id. at ¶¶ 10, 19-20.) On or about February 21, 2007, Sycoff purchased computers, acquired office space at least on a temporary basis, and arranged for AGI personnel to be flown to New York in anticipation of possibly acquiring the Accounts from S.W. Bach. ( Id. at ¶¶ 28, 29.)

On February 23, 2007, S.W. Bach transferred at least some of the Accounts to AGI and received no consideration in return. ( See id. at ¶ 1.) AGI does not dispute that a broker-dealer's right to manage accounts is customarily sold. ( Id. at ¶ 46.) Shapiro filed the Form BDW with the SEC and NASD on February 23, 2007. ( See id. at ¶ 21); 17 C.F.R. § 249.501a (2010). AGI knew that Shapiro was going to file the Form BDW before he did so. ( Id. at ¶ 27.) Shapiro, in turn, knew that upon filing of the Form BDW, the Accounts would be transferred to AGI, and Shapiro, contemporaneously with the filing of the Form BDW, directed S.W. Bach's clearing firm, RBC Dain, to transfer the Accounts to AGI. ( See id. at ¶ 23.) 2 RBC Dain followed Shapiro's directive. (Trustee Stmt. at ¶ 24.)

Immediately after the close of business on February 23, 2007, AGI became responsible for the Accounts. ( Id. at ¶ 30.) On March 2, 2007, AGI notified the S.W. Bach's customers affected by the transfer of the Accounts to AGI that their Accounts were “transferred” to AGI through a “negative consent” procedure. 3 (Trustee Stmt. at ¶¶ 25-26.) The letter implementing the “negative consent” procedure provided that [a]s of the close of business February 23, 2007, the responsibility for introducing your account to RBC Dain CS and for transmitting your orders and instructions to RBC Dain CS regarding your cash balances and security positions carried by that firm has transferred from S.W. Bach & Co. to Andrew Garrett, Inc. If for any reason you would not like this responsibility transferred to Andrew Garrett, Inc., please notify us ... before March 23, 2007....” ( See id. at ¶ 26.)

On April 24, 2007, sixty days after S.W. Bach filed the Form BDW, its registration in NASD terminated. ( Id. at ¶ 33.) However, following the transfer of the Accounts, the Financial Industry Regulatory Authority (“FINRA”), into which NASD was consolidated in July 2007, launched a special investigation inquiring whether “any payment or other consideration was made by [AGI] and/or its CEO and owner, [Sycoff] to [Shapiro], former President, CEO and shareholder of former member, [SW Bach] for the transfer of customer accounts from SW Bach to Andrew Garrett,” during which they found no such payments. ( See id. at ¶¶ 34-35.) Notably, during the course of the FINRA investigation, AGI did not disclose to FINRA that prior to February 23, 2007 AGI (i) purchased the new computers and office space in order to service S.W. Bach customer accounts; (ii) incurred expenses in anticipation of acquiring the Accounts; (iii) discussed the Accounts with Shapiro as early as October 2006 and (iv) knew Shapiro was going to file the Form BDW prior to its filing. ( Id. at ¶ 36.)

S.W. Bach earned a total of approximately $57.7 million in gross commissions from the Accounts from 2004 through the period ending February 28, 2007. ( Id. at ¶¶ 37-39, 41.) From the time the Accounts were transferred until August 2008, AGI earned gross revenue of no less than $1.5 million “generated by the customer accounts that originally had been at S W Back [ sic ].” ( See id. at ¶¶ 45.) Following the transfer of the Accounts, AGI neither employed Shapiro nor made the promised payments to Shapiro, nor has AGI ever paid consideration to the Debtor for the transfer of the Accounts. ( Id. at ¶¶ 42-43.)

B. Procedural History

On May 22, 2007, creditors of the Debtor filed an involuntary petition for relief against the Debtor in this Court under chapter 7 of the Bankruptcy Code, 11 U.S.C. § 101, et seq. (ECF # 1.) The Court entered an order for relief on June 29, 2007 and Togut was appointed as the Trustee. (ECF # 8.)

The Trustee commenced an adversary proceeding against AGI, RBC Dain, Shapiro and JAS Management on June 15, 2009. 4 (Trustee Stmt. at ¶ 5, 7.) The Trustee asserted five claims against AGI, including the constructive fraudulent conveyance claim in Count Nine, as well as claims for aiding and abetting Shapiro's alleged breach of fiduciary duties (“Count Eight”), restitution and unjust enrichment against AGI (“Count Ten”), disallowance of bankruptcy claims filed under 11 U.S.C. § 502(d) (“Count Seventeen”) and equitable subordination/disallowance under 11 U.S.C. § 510(c) (“Count Eighteen”). AGI answered the Complaint on August 14, 2009, asserting four affirmative defenses in its Answer (ECF # 14) to all claims including Count Nine, arguing: (1) the litigation is not properly maintained under applicable and controlling industry rules; (2) AGI agreed to accept the transfer of the Accounts as part of the regulatory scheme, including SEC Rule 15c3-1, the “Net Capital Rule,” and Rule 15c3-3, the “Customer Protection Rule,” designed to protect customers of brokerage firms that cease operations due to financial insolvency; (3) once the Debtor tendered its...

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